KCB caps interest rate at 14.5pc as banks come to terms with new law
By Patrick Alushula | August 30th 2016
NAIROBI: Kenya Commercial Bank (KCB) has become the second lender to reduce its cost of loans to 14.5 per cent.
Its decision, which comes after Cooperative Bank became the first to do so last Friday, now puts more pressure on other major lenders in the country to comply with the Bill President Uhuru Kenyatta signed into law that caps commercial banks’ lending rates to four percentage points above the Central Bank Rate (CBR), which is currently at 10.5 per cent.
“In compliance with Banking (Amendment) Act, all new loans are capped at 14.5 per cent effective today (yesterday). Guidance on existing loans awaits direction from CBK (Central Bank of Kenya),” KCB communicated to customers through text messages yesterday.
However, like Cooperative Bank, , the country’s largest bank is silent whether or not new deposits will also start earning at least 7.35 per cent interest as provided in the amended law that is awaiting implementation.
Even as some of the banks rush to comply, industry insiders reckoned that borrowers have taken a wait-and-see position to benefit from the new laws capping interest rates.
The decision to reduce interest rates differs from last week’s position by Kenya Bankers Association (KBA) that banks were to await direction from the regulator first. However, yesterday, KBA boss Habil Olaka clarified to The Standard, it was fine for banks to react in advance.
“Banks are at liberty to do so. We are not stopping banks from implementing. Even without clarity, banks are responding to the concerns that were raised by the market. They can respond but once the law becomes clear, they will move accordingly,” said Mr Olaka.
Just like Cooperative Bank, KCB has said it does not know how the amended law will impact on the existing loans and therefore it is awaiting the decision of the regulator. This is the same position held by KBA.
According to Olaka, what is critical now to any borrower is how the law will impact on the cost of borrowing and not how long it will take before implementation. So far, KBA is yet to get any communication from CBK.
“We are yet to get direction from the regulator. Until the law is gazetted, I don’t think anything will come out clear. When the law is gazetted, we will know which kind of clarifications we need,” added Olaka.
Even as banks adjust to this amendment that caps interest rates at not more than four per cent above the base rate set and published by CBK, their financial statements show that interest income has been accounting for over half of their total income.
A look at top nine profitable banks in Kenya as at June 2016 shows that on average, 69 per cent of their total income is derived from interest income. On average, non-interest income is just 31.2 per cent.
Only CfC Stanbic ranks better with 42.1 per cent of its income coming from non-interest income. The bank, whose half-year profit grew by 22 per cent to Sh2.4 billion, got Sh3.97 billion from non-interest income against Sh5.46 from interest income.
Before President Uhuru Kenyatta’s decision, the bank’s CEO Philip Odera had told investors that he expected minimal impact since his group had diversified its income sources.
Non-interest income is derived from areas such as fees and commissions, foreign exchange trading and dividends.
Financial statements for the six-month period ended June 30, 2016 show that Equity Bank, which has the highest number of customers in the country only got 33.8 per cent of its money from non-interest income.
Of their total income, KCB and Cooperative bank has 31.6 per cent and 32 per cent respectively of their total income coming from non-interest income.
In the list of top nine profitable lenders, Diamond Trust Bank is the most over-reliant on interest income.
Out of total income of Sh12.08 billion received by half year, only Sh2.51 billion or 21 per cent comes from non-interest income.
I&M Bank is also among most profitable lenders with least income from non-interest sources. Its half year books show that just 24.6 per cent of its income is non-interest.
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